House Bill Tightens Market Oversight

Following deals and compromises that ended only shortly before the hearing began, the House Agriculture Committee last week passed HR 3795 — more commonly known as the “derivatives oversight” legislation —by a bipartisan voice vote.

Advertisement

Following deals and compromises that ended only shortly before the hearing began, the House Agriculture Committee last week passed HR 3795 — more commonly known as the “derivatives oversight” legislation —by a bipartisan voice vote.

“This is the third time we’ve moved on this legislation,” said Rep. Colin Peterson of Minnesota, chairman of the committee, at the outset of the hearing. “This builds on the bill we passed in February, HR 977.

“We’ve made significant improvements, incorporated ideas from the (Obama) administration, and from a lot of other folks we’ve talked to. We have a bill here that will bring all these dark markets into regulation and transparency and preclude the kind of problems we’ve had in the financial system from happening in the future.”

The committee’s action, said Oklahoma’s Frank Lucas, ranking member of the committee, “is the next part of the process — most assuredly not the final step — in bringing a regulatory structure to an unregulated market. … Let’s finish this today so we can move to the next step and, ultimately, come up with a good piece of legislation that can be signed into law.”

While the legislation strengthens regulation of derivatives — an industry worth nearly $450 trillion — that are often pointed to as a chief villain in the current financial crisis, Peterson is sure to face criticism for exempting some of the transactions from tough scrutiny he’d promised in earlier hearings. By doing so, Peterson bucked the Obama administration and many in his own party who wanted all over-the-counter (OTC) derivatives to be under federal regulation, to pass through a clearinghouse or be traded on exchanges to ensure terms are public.

If the legislation is passed into law, transactions with “end users” — including airlines, manufacturers and utilities — would be exempt from clearing and terms allowed to remain in the shadows. End-users, said Peterson, weren’t responsible for the current financial situation, hadn’t been given federal bail-out funds and thus shouldn’t be held to the most rigorous oversight standards.

Peterson also insisted the exemptions wouldn’t apply to the vast majority of deals and were not loopholes financial market-players could exploit. To further shore up the market’s safety, the legislation calls for customized contracts to maintain higher margin and capital requirements than cleared swaps.

A statement from the House Agriculture Committee says the bill “institutes a clearing and trading requirement for all OTC swap transactions between dealers and large market participants that are accepted by a clearinghouse. Non-cleared swaps must be reported, with major participants and dealers adhering to strengthened capital and margin requirements. The bill exempts commercial end users who use derivatives markets to hedge their price risk from the clearing requirement.